MW 'Crazy' investors are betting too much on the U.S. stock market
By Brett Arends
They're breaking one of the basic rules of investing
Stocking up on U.S. equities isn't crazy or outrageous, some market watchers argue.
During the first 60 years of baseball's World Series, the New York Yankees won the title an average of once every three years. By the early '60s, it was probably tempting to assume this dominance would continue in the future. But it didn't.
Over the next 30 years, the Yankees won the World Series just twice. So far this millennium, they have even underperformed their hated rivals, the Boston Red Sox - whose chronically losing ways were once the subject of New York derision - by two titles to four.
I was thinking of this when a Wall Street investment report dropped onto my virtual desk, telling me that you were A-OK having most of your money in the U.S. stock market, compared to the rest of the world, because U.S. stocks have "historically" outperformed international markets anyway.
The paper is an update of one published some months ago. Analysts at global bank HSBC $(HSBC)$ (UK:HSBA) (primarily traded on the London Stock Exchange) point out that, at current prices, U.S. stocks make up 60% of a global stock-market portfolio, and argue this is neither "crazy" nor even "outrageous." They reckon something like that is the optimal allocation to U.S. stocks compared to the rest of the world.
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Their argument is pretty simple: Yes, U.S. stocks are, on average, much more expensive than overseas markets in comparison to factors like earnings and dividends. But U.S. earnings, on average, are growing much faster. And, crucially, "U.S. equities have been lower risk than other regions historically." That lower risk makes each dollar of expected earnings more valuable in comparative terms.
"The required return for the U.S. is actually below the weighted average return [for the rest of the world]," the HSBC strategists wrote. "The main reason for this is the lower risk of U.S. equities and a below-average pairwise correlation to other markets."
The basis for this assumption that U.S. stocks have lower risk is historical data on monthly returns, measured in U.S. dollars, since ... the end of 1987.
Wait, what? This is a mighty convenient time frame to choose. It encompasses the insane Japanese asset bubble of the late 1980s and the lost decades that followed, and starts after the infamous "Black Monday" stock-market crash on Oct. 19, 1987. It also encompasses U.S. outperformance since the 2008-09 financial crisis.
There again, it misses some other periods, such as the 1970s and parts of the 1980s, when U.S. stocks disastrously underperformed international stocks. And it glosses over the period from 2000 to 2009, when overseas stocks did better. If history says anything, it's that these things come and go in cycles. Goldman Sachs says that U.S. stocks have generally done better than the rest of the world since 1990, but the reverse was true for long periods beforehand.
And Antti Ilmanen and Thomas Maloney at hedge-fund giant AQR argue that much or most of the supposedly superior performance of U.S. stocks since 1990 is due to a simple quirk: They have become more expensive in relation to earnings. "U.S. outperformance since 1990 primarily reflects richening relative valuations," they wrote recently.
Someone taking this as evidence that U.S. equities will continue to outperform in the future is merely engaging in double counting.
U.S. stocks currently make up just over 60% of the global stock-market portfolio (as tracked by a global index fund such as Vanguard Total World Stock VT). And if you ignore tricky emerging markets and just focus on the stock markets of the world's developed economies, the percentage is even bigger: Some 72% of the iShares MSCI World ETF URTH is allocated to the U.S. But even that huge weighting isn't enough for ordinary U.S. investors: The average has 78% of their stock allocation in U.S. stocks, according to Goldman Sachs.
Vanguard tells me that among their individual investor clients, the figure is even higher: No less than 87% of their equity allocations are in domestic U.S. stocks.
Having 78% of your stock-market allocation in U.S. stocks is hard to justify, let alone 87%. It flouts the single most important rule of investing, which is to make sure you are diversified; at least 60% U.S. stocks and 40% international stocks would be better. But even that gives too much weight to a market that is already the most expensive - namely, the U.S. - precisely by weighting its allocations based on stock-market valuations.
Index provider MSCI says that if you were to invest equal amounts in all the large and midsize companies in the developed markets of the world - which is arguably the most diversified approach - then the balances would be reversed: The U.S. would account for about 40% of your stock portfolio, and the rest of the world would make up 60%, led by a 16% allocation to Japan.
Nearly all mutual funds and ETFs available to the public are weighted by capitalization, not equally across stocks. This works for the fund industry, for technical reasons; whether it works for us customers is another question. Equal weighting has beaten the traditional capitalization weighting since MSCI began counting early this millennium, despite the recent mania for megacap tech stocks like the "Magnificent Seven."
I have yet to hear a single persuasive argument in favor of capitalization-based weighting over equal weighting. And using the MSCI World portfolio as your guide, being 40% invested in U.S. stocks and 60% in developed international stocks (such as the MSCI EAFE index) sounds more sensible than the reverse.
-Brett Arends
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December 04, 2025 13:56 ET (18:56 GMT)
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